Question21 Rishab is writing a put option on a stock with a strike price of $78 and an option premium of $2.50. What price would the stock need to stay above for him to make a profit? [4 marks] [input] Your response must be entered as a numerical value with 2 decimal places and excluding the dollar sign ($). Maximum marks: 4 Flag question undefined

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BlackTom AI · Accepted Answer

The question asks for the breakeven stock price at expiration for a put option writer given a strike of 78 and a premium of 2.50.
Consider how a short put behaves: if the stock price ends above the strike, the put expires worthless and the writer keeps the premium as profit.
The writer’s profit from the premium is fixed at 2.50 per share, so the only point at which gains cease is when the stock price falls enough to make exercising the put beneficial for the holder, offsetting the premium received.
Breakeven occurs where the payoff to the put writer equals the premium collected. For a put, the payoff to the holder is max(K − S, 0), so the writer’s loss starts when S drops below K − premium. Therefore, breakeven price = Strike − Premium = 78 − 2.50 = 75.50.
Thus, if the stock stays above 75.50 at expiration, the put remains unexercised and the writer profits the full 2.50 premium. If the stock falls below 75.50, losses start accumulating for the writer.
In short order: 78.00 minus 2.50 equals the breakeven price of 75.50.

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